Iceland's economy washed up on shore

REYKJAVIK - In Icelandic, the language that is closest to the Old Norse spoken by the Vikings, a common word to express unexpected good fortune is hvalreki ("beached whale"). Iceland today would need a lot more than a few whales washing up on its beaches to rescue it from its new economic woes.

In the rest of the world the stock exchange indices rise and fall, governments draft emergency plans and citizens struggle to understand the global credit crunch. In Iceland, the only state so far to be nearly ruined by the crisis, the implications are palpable.

Almost overnight people saw years of savings wiped out, and thousands of banking jobs disappeared as the country's failed banks were almost totally nationalized last week. Food prices have soared and there have been reports of widespread hoarding of imported foodstuffs. The krona has become a pariah currency, and Icelanders are now permitted to buy only a few hundred euros if they want foreign currency - and even then they must present airline tickets as proof of imminent travel abroad.

In just two weeks Iceland went from being one of the wealthiest countries in Europe, in terms of per-capita Gross Domestic Product, to one of the poorest, banging on the doors of Russia, its Scandinavian neighbors and the International Monetary Fund begging for assistance.

The credit crisis caught Helga Flosadottir, 24, at 4 P.M. on October 6, while she was watching television. Prime Minister Geir H. Haarde called a special press conference at which he announced emergency legislation giving the government new powers to deal with the crisis, including taking over the banks. He warned of the danger of "national bankruptcy." Within four days the country's three largest banks were nationalized and trading in the krona and on Iceland's stock market was suspended. Yesterday trading resumed for the first time since last Thursday, but it was suspended a few hours later after the main shares index plunged 76 percent.

"I had 200,000 krona in a mutual fund that was invested in the banks, and they disappeared completely," said Flosadottir, a doctoral candidate in chemistry with a 7-year-old son. "I also have a mortgage that is linked to the Japanese yen and the Swiss franc. The monthly calculation is done on the 27th of the month, and I'm afraid to see how much this month's payment will increase - I think it'll be at least 40 percent."

Flosadottir is not worried, however. "I think more carefully about how I spend my money, and I switched to using a bicycle. But all Icelanders are in this mess together, I don't think it's possible that we'll all be reduced to grinding poverty, do you?". Reykjavik does not look bankrupt. New cars roll down the streets, between houses with corrugated-iron roofs that give Iceland's capital the appearance of a wealthy and well-designed fishing village. Residents walk in new coats, battling the icy winds blowing off the fjords, and the cafes and bars are far from empty. The long lines at the banks from the first days of the crisis are gone, and according to Susanna Dorisdottir, a clerk at a branch of Glitnir Bank, "That's how it was yesterday, too, and we hope it will stay that way for the whole week."

But underneath is a different reality. To a large degree Iceland was the guinea pig of the free economy. In 2000 the country's banking system was privatized and state regulation was lifted. In the competitive atmosphere that developed, the banks offered loans and credit with convenient terms and a local real estate bubble was formed, pushing up property values. The banks and investment houses ventured outside the country's borders, spending about 100 billion euros on property and other assets, dwarfing Iceland's annual GNP of about 10 billion euros.

As long as the global financial market continued to refinance the loans, Icelanders held onto the illusion that their economic miracle was stable and that their formerly poor country had become one of the wealthiest in the world. Starting early last week, when the international credit market dried up, the debt refinancing stopped and Iceland's people discovered that the banks had, in effect, robbed the state and themselves. The experiment had failed.

"I have to admit I never thought there would be a crisis of this size," Frosti Olafsson, an economist at the Iceland Chamber of Commerce said. "It's true that the krona is a currency that is traded in the tiniest of amounts, and that developing a huge financial sector as we did in Iceland, with a weak currency, makes the entire economy more vulnerable to worldwide fluctuations, but no one predicted the extent of the global credit crisis."

"The Icelandic people obviously deserve a share of the blame," Bergur Ebbi Benediktsson and Sveinn Birkir Bjornsson wrote in the current issue of the English-language Reykjavik Grapevine. "Their blatant consumerism was fueled by the easy access to cold, hard cash and the misconception that the party would last forever. Well, it was fun while it lasted, but now we will need to clean up and get our house in order."